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ADJUSTING ENTRIESThe are two ways of prepare the accounts of a
Business:
1. Accrual Basis2. Cash Basis
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The Accrual Basis Revenues are recorded when they are earned.
Expenses are recorded when they are incurred.
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The Cash Basis Revenues are recorded when the cash is receipted.
Expenses are recorded when the cash is paid.
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Some Relevant Accounting
ConceptsAccounting period concept - a period, usually one
year when a business prepares its detail financialstatements to ascertain profitability.
Revenue concept states that an accountant shouldrecord income when it is earned. Revenue is earned
when a business has discharged its obligation under acontract to make, deliver goods or services.
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Some Relevant Accounting
Concepts Time period concept - requires that reports are made
often to measure income and that accounts areupdated at the end of each period.
Accruals/Matching Concept - expenses incurredshould be matched against revenues earned during the
same period.
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Adjusting Entries1. These are entries that are usually made at the close of
an accounting period to ensure that the matchingconcept is being complied with.
2. They are also needed to update the asset and liabilityaccounts.
3. To properly measure net income or loss on theincome statement and assets and liabilities on thebalance sheet.
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Adjusting EntriesCategories of adjusting entries:
Accruals;
Prepayments
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Types of adjusting entries1. Prepaid expenses
2. Unearned revenues
3. Accrued expenses4. Prepaid revenues
5. Depreciation
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Example
Case Three(3) from worksheet #2.
Justin Park Legal Services
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Journalizing Adjusting EntriesAcc # Details Dr Cr
a) 523 Office Supplies Exp. 5,000
142 Office Supplies 5,000
To record supplies expense
b) 541 Depn. Exp-Office equip 30,000
181.1 Acc. Depn. Office equip. 30,000
To record depn. On Office Equip.
c) 542 Depn exp. comp. equip 10,000
181 Acc. Depn comp. equip.. 10,000
To record depn. Of comp. equip.
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Journalizing Adjusting EntriesAcc # Details Dr Cr
d) 535 Insurance Expense 1,000
145 Prepaid Insurance 1,000To record Interest expense
e) 219 Wages Expense 3,000
511 Wages Payables 3,000
To accrue wages expense
49,000 49,000
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Worksheet
Adjusted Trial Balance
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Account Title Acc # Unadjusted Adjustments Adjusted Trial Balance
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Account Title Acc # Unadjusted Adjustments Adjusted Trial Balance
Trial Balance
Dr Cr Dr Cr Dr Cr
Accounts $ $ $ $ $ $
Cash 101 70 000 70,000
Office Supplies 142 8 000 5,000 3,000
Prepaid Insurance 145 12 000 1,000 11,000
Office Equipment 181 150 000 150,000Accumulated Depreciation- OfficeEquipment
181.1 30,000 30,000
Computer Equipment 187 60 000 60,000
Accumulated Depreciation-Computer Equipment
187.1 10,000 10,000
Notes Payable 201 50 000 50,000Accounts Payable 202 5 000 5,000
Wages Payable 219 3,000 3,000
Justin Park, Capital 311 114 000 114,000
Justin park, Drawings 312 50 000 50,000
Client Fees 401 400 000 400,000
Wages Expenses 511 120 000 3,000 123,000
Rent Expense 521 50 000 50,000
Office Supplies Expense 523 5,000 5,000Telephone Expense 525 10 000 10,000
Utilities Expense 533 39 000 39,000
Insurance Expense 535 1,000 1,000
Depreciation Expense - OfficeEquipment
541 30,000 30,000
Depreciation ExpenseComputerEquipment
542 10,000 10,000
Net Income
TOTAL 569 000 569 000 49,000 49,000 612,000 612,000
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Worksheet - Income Statement & Balance Sheet
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Account Title Acc # Income Statement Balance Sheet
Dr Cr Dr Cr
Accounts $ $ $ $
Cash 101 70,000
Office Supplies 142 3,000Prepaid Insurance 145 11,000
Office Equipment 181 150,000
Accumulated Depreciation- Office Equipment 181.1 30,000
Computer Equipment 187 60,000
Accumulated Depreciation- ComputerEquipment
187.1 10,000
Notes Payable 201 50,000
Accounts Payable 202 5,000
Wages Payable 219 3,000
Justin Park, Capital 311 114,000
Justin park, Drawings 312 50,000
Client Fees 401 400,000
Wages Expenses 511 123,000
Rent Expense 521 50,000
Office Supplies Expense 523 5,000
Telephone Expense 525 10,000
Utilities Expense 533 39,000
Insurance Expense 535 1,000
Depreciation Expense - Office Equipment 541 30,000
Depreciation ExpenseComputer Equipment 542 10,000
Net Income 132,000 132,000
TOTAL 400,000 400,000 344,000 344,000
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Justin Park Legal Services
Income Statement for the year ended December 31, 20-
$ $Client Fees 400,000
Wages Expenses 123,000
Rent Expense 50,000
Office Supplies Expense 5,000
Telephone Expense 10,000
Utilities Expense 39,000
Insurance Expense 1,000
Depreciation Expense - Office Equipment 30,000
Depreciation ExpenseComputer Equipment 10,000 268,000
Net Income 132,000
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J ti P k L l S i
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Justin Park Legal Services
Statement of Owner's Equity for the year ended
December 31, 20-
$ $
Capital at start (January 1, 20-) 114,000
(add) Net Income 132,000
(less) drawings (50,000) 82,000
Capital at end (Dec 31, 20-) 196,000
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Preferred Balance Sheet FormatAssets
Fixed assets Cost AccumulatedDepreciation Net Book Value
Office Equipment 150,000 30,000 120,000
Computer Equipment 60,000 10,000 50,000
210,000 40,000 170,000
Current assets
Office Supplies 3,000
Prepaid Insurance 11,000Cash 70,000 84,000
Total Assets 254,000
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Preferred Balance Sheet FormatLiabilities
Current Liabilities
Accounts Payable 5,000
Wages Payable 3,000 8,000
Long-term Liabilities
Notes Payable 50,000
Total liabilities 58,000
Owner's Equity
Justin's Capital 196,000
Total liabilities & Equity 254,000
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Journalizing Closing EntriesDate Details Dr CR
31-Dec Client Fees 400,000
Income Statement (Summary) 400,000
31-Dec Income Statement (Summary)268,000
Wages Expenses 123,000
Rent Expense 50,000
Office Supplies Expense 5,000
Telephone Expense 10,000Utilities Expense 39,000
Insurance Expense 1,000
Depreciation Expense - OfficeEquipment
30,000
Depreciation Expense ComputerEquipment
10,000
31-Dec Income Statement (Summary)114,000
Capital Account (Justin's) 114,000
31-Dec Capital Account(Justin's) 50,000
Drawings Account 50,000 19Prepared by Winston Delahaye
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Post Closing Trial BalanceJustin Park Legal Services
Post-closing Trial Balance as at December 31, 20_
Details DR CR
Cash 70,000
Office Supplies 3,000
Prepaid Insurance 11,000
Office Equipment 150,000Accumulated Depreciation- OfficeEquipment
30,000
Computer Equipment 60,000
Accumulated Depreciation- ComputerEquipment
10,000
Notes Payable 50,000
Accounts Payable 5,000
Wages Payable 3,000
Justin Park, Capital 196,000
294,000 294,000
20Prepared by Winston Delahaye